Question

If investment increases by 200 crores and MPC is 0.2, what will be the increase in total income?

Hint:

Remember: The income multiplier formula is \(\frac{1}{1 - \text{MPC}}\). A higher MPC leads to a larger multiplier and greater income change.

Answer 1

Step 1: Recall the formula for the multiplier.
The income multiplier can be calculated using the formula: \[ \text{Multiplier} = \frac{1}{1 - \text{MPC}} \] where MPC is the Marginal Propensity to Consume.
Step 2: Apply the given values.
Here, MPC is given as 0.2. Therefore, the multiplier is: \[ \text{Multiplier} = \frac{1}{1 - 0.2} = \frac{1}{0.8} = 1.25 \]
Step 3: Calculate the increase in income.
The increase in income is calculated by multiplying the increase in investment by the multiplier: \[ \text{Increase in income} = \text{Multiplier} \times \text{Increase in investment} \] Substituting the values: \[ \text{Increase in income} = 1.25 \times 200 = 250 \, \text{crores} \]
Step 4: Conclusion.
Thus, the total increase in income will be 250 crores.